Who needs SOX?

Close on the heels of the third anniversary of Sarbanes-Oxley, here are some updates to perceptions on SOX, what Business Week dubbed in a recent issue as "the corporate equivalent of root canal".

• Business Week reports that big public companies spent thousands of hours and an average of $4.4 million per firm last year to make sure that someone was looking over the shoulder of key accounting personnel at every step of every business process, according to Financial Executives International (FEI). Designed to nip accounting problems in the bud before they blossom into fraud, Section 404 is a core provision of the 2002 corporate-reform law. The number of companies that disclosed serious chinks in their internal accounting controls jumped to 586 in the first four months of 2005, compared with 313 for all of 2004, according to Glass, Lewis & Co., a financial research firm.
• Pitney Bowes's exhaustive review involved testing 134 processes and more than 2,000 controls in 53 locations -- there were no significant weaknesses.
• Stock markets around the world have overperformed the U.S. Lisa Hess, in a recent issue of Forbes Asia, writes "Let me suggest a few unorthodox reasons for the unimpressive showing of American stocks. Although greater disclosure is a good thing, the new information we're getting is often useless. The double whammy of Sarbanes-Oxley and accountants terrified of their own liability has conspired to generate 10-Qs and 10-Ks written by lawyers for lawyers. No one else can read them, and that harms investor confidence."
• This year the 339 companies on Forbes' roster of closely held businesses sold a trillion dollars' worth of goods and services and employed 4 million people. Last year's count of privately held U.S. businesses with at least $1 billion in revenue was only 305. No evidence of a causal nexus, but by going private, a company can wash its hands of SOX.
• Small and medium sized firms have expressed significant dissatisfaction with SOX compliance standards and recommended differential standards from large public firms. William Gienke at Jefferson Wells pointed out efforts that have been taken in response to these demands. In December of 2004, the SEC launched the Advisory Committee on Smaller Public Companies. This group’s charter is to “assess the current regulatory system for smaller companies under the securities laws of the United States and to make recommendations for changes.” In addition, the PCAOB is hosting forums on Auditing in the Small Business Environment aimed at helping smaller public companies and their auditors learn more about the PCAOB’s work.
• SOX has also seen the growth in offshoring services. Although the business process itself, for which compliance requirements must be met, has not been outsourced, the supporting technology which enables compliance has seen increased outsourcing to India and other low-cost destinations.
• SOX compliance is paying unexpected dividends for some firms. For example, Pitney Bowes quickly consolidated four accounts-receivable offices into one, saving more than $500,000 this year alone. Cisco combined separate steps for selling computer hardware and providing support so that customers could get one-stop shopping. Genentech got a new system to consolidate financial data up and running months ahead of schedule. However, these rewards are largely cited by large firms, and even they agree that they are not getting a full bang for their buck.